July 21, 2016

Could India Be the First to Get Rid of Cash?

"Black money" -- the colloquial name for a vast network of off-the-book cash transactions and unbanked savings -- is one of India's biggest scourges. Amounting to as much as $460 billion a year, bigger than the GDP of Argentina, all that money lies beyond the reach of the tax authorities, creditors and anti-corruption investigators.

Efforts to bring it into the open have struggled. Ironically, though, they may be setting up India to leapfrog past other, far more advanced economies into a future without any cash at all.

India's black money pile is unusually large for several reasons. First and foremost, about half the country's output comes from the small, informal sector, where cash transactions are the norm. Meanwhile, taxes are cumbersome to pay and easy to avoid. To collect revenue, India’s government has to rely on indirect levies such as sales and excise taxes, which are distortionary and regressive, rather than on income tax. Direct taxes contribute only 35 percent of the take in India, compared to the OECD ideal of two-thirds.